Topic Tags: U.S Economy

One Big Beautiful Bill Act: Excise Tax Changes Legislative Update

The One Big Beautiful Bill Act was passed by Congress and signed into law by President Donald Trump on July 4, 2025. The legislation includes significant updates to the excise tax structure on net investment income of certain educational institutions, with direct implications for private colleges and universities related to their endowments.

This legislative update addresses considerations for investors regarding:

  • Changes to the current excise tax for private colleges and universities
  • Private foundation excise tax
  • Scrutiny of tax-exempt debt issuance
  • Reinstatement of a universal charitable deduction

The One Big Beautiful Chart

Late last week, President Trump signed a sweeping tax and spending package, branded by the White House as the “One Big Beautiful Bill,” aimed at enacting major elements of his domestic agenda. Specifically, the legislation cements the substantial tax reductions introduced during the first Trump term, which were slated to sunset at the end of this year. The package also includes an increase to the cap on the state and local tax deduction, raising it from $10,000 to $40,000. Changes to the child tax credit and estate and gift tax exemption were also included in the legislation. A portion of the bill’s funding comes via reductions to programs including Medicaid and the Supplemental Nutrition Assistance Program.

Forecasts from various organizations suggest the immediate effect of these new policies on U.S. GDP growth is indeterminate. For instance, recent reports from the Tax Policy Center and Yale Budget Lab indicate that the domestic economy may see growth increase by less than 1.0% in the years ahead due to the legislation. These estimates are in stark contrast to those of the White House Council of Economic Advisers, which optimistically predicts a 4.8% boon to U.S. GDP by 2028 thanks to the package. Among the provisions contributing to the legislation’s prospects to boost growth are temporary deductions for tip income and higher defense spending. On the cost side, the legislation may increase federal deficits by $3.4 trillion over the next decade and result in millions losing health coverage according to projections by the nonpartisan Congressional Budget Office. These projections have been challenged by both Republican lawmakers and the White House. While the full economic consequences of the “One Big Beautiful Bill” will be revealed over time, the heated debate surrounding the legislation and the size of the package indicate its overall impact could be meaningful in the years ahead.

Bring Out the Big Guns

NATO has decided to take the phrase “don’t bring a knife to a gun fight” quite literally. Last week at the NATO summit in The Hague, the 32 member countries pledged to increase their defense spending as a percentage of GDP from the current 2% target share to a new 5% target share. The pledge includes spending 3.5% on defense items such as troops and weapons and 1.5% on defense-related initiatives such as critical infrastructure, cybersecurity, and resilience measures. This change comes on the heels of criticism from President Trump regarding the underspending of member nations on security, as well as his ambivalent comments on the U.S. commitment to collective defense under Article 5. Additionally, commitments to the alliance have been reinvigorated given the ongoing war in Ukraine and a desire to combat an increasingly hostile Russia.

This new commitment follows a trend of increased defense spending by NATO member states, as there are now significantly more members achieving the 2% target than in previous years. In 2021, the year prior to Russia’s invasion of Ukraine, only six member states achieved the 2% target, compared to 23 member states last year. Some members of NATO even pledged to spend 3.5% of GDP on defense prior to the rollout of the new 5% target. That said, and as this week’s chart indicates, only one NATO country (Poland) currently spends at that 3.5% level.

While the higher spending guidelines are groundbreaking, there is still significant progress that must be made for members to achieve this new level. For example, simply to meet the previously planned target of at least 3.5% of GDP, Germany would have to spend an extra €689 billion on defense through 2035. Similarly, Italy and France would each need to spend more than €400 billion. This increase in spending may provide near-term tailwinds for European equities, particularly defense stocks as detailed in a previous Chart of the Week. However, higher defense spending could add to already ballooning fiscal deficits in many member states, meaning inflation may remain elevated across Europe. While it remains to be seen if NATO members will achieve the new spending target and what the ultimate impact on financial markets will be as a result of these dynamics, one thing is certain: NATO is no longer willing to not be armed and dangerous.

Oil Markets in Focus Given Middle East Turmoil

Tensions in the Middle East spiked last week following a major escalation in the conflict between Israel and Iran, raising concerns over the stability of the global energy supply chain. To that point, the Strait of Hormuz — a vital chokepoint for global oil and gas flows that connects the Persian Gulf and the Gulf of Oman — has become increasingly fragile amid new reports of electronic interference with navigation systems and a tanker collision near the strait earlier this week. Roughly 20 million barrels of crude oil pass through the Strait of Hormuz each day, accounting for roughly 27% of the world’s maritime oil trade and 20% of total global oil consumption. Additionally, around 20% of global liquefied natural gas (LNG) is transported through the area, primarily from Qatar. Despite the heightened conflict and concerns that Iran could attempt to block the Strait of Hormuz, tanker traffic has remained relatively stable, with 111 vessels reportedly transiting through the Strait on June 15. This figure is down only slightly from 116 on June 12, and consistent with the recent daily range of 100 to 120 vessels.

Most of the material exported through the Strait of Hormuz is delivered to Asia, with roughly 84% of the crude oil and 83% of the LNG being shipped to the region last year. China, India, Japan, and South Korea accounted for approximately 69% of these flows, making Asia particularly vulnerable to supply shocks. While the U.S. has reduced its reliance on Middle East crude oil imports in recent years, with only 6% of its oil imports coming via the Strait, concerns remain for potential inflationary pressures and global GDP headwinds if regional conflicts escalate further.

In response to recent events, Brent crude oil has climbed to over $78 per barrel, and any further escalation could trigger additional volatility in energy prices and, by extension, global financial markets. Indeed, the Strait of Hormuz remains one of the most strategically significant and sensitive corridors for the global economy and investors should continue to monitor developments within the region given the potential for broader economic impacts.

The Global Economic Outlook

In a report published last week, the Organization for Economic Cooperation and Development sharply lowered its global economic growth outlook, pointing to the disruptive impact of ongoing trade tensions. Global GDP is now projected to grow by 2.9% on a year-over-year basis in 2025, down from an estimate of 3.1% in March. The United States economy is expected to grow by 1.6% this year, which represents a sharp downgrade from the March forecast of 2.2% by the OECD. Indeed, out of the countries outlined in this week’s chart, only India saw its 2025 economic growth estimates revised upward in the most recent OECD projections, with forecasts for the euro area and Japan remaining in line with where they stood in March. These assessments underscore the reality of trade disruptions as major drags on global economic momentum. Further, the OECD emphasized in its report that even a complete rollback of tariffs by the U.S. and other nations would not provide an immediate boost to the global economy due to lingering uncertainty about the direction of future policy.

In addition to trade headwinds, the OECD pointed out that domestic factors are compounding U.S. economic challenges, with immigration restrictions and a shrinking federal workforce contributing to weaker growth prospects. Additionally, despite tariff-generated revenues (which hit an all-time high last month), the U.S. budget deficit is expected to widen as slowing economic activity will likely outweigh any fiscal gains from trade barriers. Inflation in the U.S. will also rise in the near term according to OECD forecasters, which could delay substantive monetary easing by the Federal Reserve until at least 2026. The report cautions that this timeline could be pushed even further if inflation expectations become unmoored. Beyond the immediate economic implications of trade disputes, the OECD raised alarm about mounting global fiscal pressures and urged governments to streamline spending and improve revenue collection by expanding their tax bases. Clearly, policymakers around the world have much to evaluate as we prepare to enter the second half of 2025.

The Hidden Cost of NOI

Capital expenditure is a crucial yet sometimes underappreciated component in real estate underwriting, as it directly eats into the cash flows available to investors. While a given sector may benefit from certain tailwinds (e.g., demographic shifts, technological adoption, etc.), elevated capital expenditure requirements can materially impair the growth and durability of net operating income. This is particularly relevant in spaces like life science, medical office, and data centers, where structural demand is strong but operational and replacement costs are high.

A clear takeaway from this week’s chart is the connection between GDP-driven sectors and elevated capital expenditure burdens, with both the office and hotel spaces standing out as significantly more capital-intensive than other property types. Specifically, the office sector has suffered sharp valuation declines in recent years, but its capital expenditure challenges were apparent even before that correction. Aging building stock, tenant improvement costs, and escalating obsolescence make net operating income growth difficult within the office space, especially for older assets in secondary markets. This structural drag further complicates recovery prospects for the sector in a post-pandemic, hybrid work environment. On the other end of the spectrum are self-storage assets, with capital expenditure at only 7.7% of net operating income. The low capital intensity, scalability, and operational simplicity of the self-storage space make it one of the most capital-efficient sectors within real estate and especially attractive given the uncertain macroeconomic environment.

In conclusion, while sectors like office or retail may exemplify industry innovation or trend leadership, select opportunities still exist within these spaces. Diligent asset selection that focuses on location, tenant quality, lease structure, and physical upgrades can lead to attractive risk-adjusted returns, even within sectors that exhibit higher levels of capital expenditure. In a yield-starved world, nuanced underwriting and asset-level differentiation remain essential when it comes to extracting value from these spaces.

What Has Private Equity Done to Small-Cap Stocks?

Private markets have grown exponentially over the last two decades, driven by attractive long-term returns, diversification benefits, and early-stage value creation. As companies stay private longer, much of their initial growth can be realized outside of public markets, which could challenge the small-cap premium and contribute to a shift in the composition of public markets. The following newsletter examines this dynamic and potential impact on small-cap stocks.

I Want a New Drug

The aging population in the United States has garnered increasing attention over the past two decades, coinciding with the retirement of the Baby Boomer generation and the associated rise in age-related chronic conditions such as arthritis, Alzheimer’s disease, and cancer. As of 2023, over 59 million individuals (17.7% of the U.S. population) were aged 65 or older, and this figure is projected to approach 80 million by 2040.¹ A central challenge associated with this demographic shift is ensuring adequate care, particularly through the effective management of chronic illnesses. One critical avenue for addressing this issue is through investment in the development of efficient and innovative pharmaceutical therapies.

Since 2015, pharmaceutical companies have experienced revenue losses totaling approximately $125 billion due to the expiration of patent exclusivities, with projections indicating nearly double that amount may be lost by 2030. While elevated interest rates and heightened regulatory scrutiny by the Federal Trade Commission contributed to a significant decline in merger and acquisition (M&A) activity in 2022 and 2023, the sector may be well-positioned for a resurgence.² Many drug manufacturers currently maintain robust balance sheets and hold over $180 billion in cash reserves, potentially fueling a new wave of strategic acquisitions.

Realizing a sustained M&A resurgence in research and development will require targeted investment within the biopharmaceutical sector, particularly in early-stage drug development and in the services and technologies that support these endeavors. These include start-ups advancing compact and automated manufacturing technologies, which help mitigate the impact of rising domestic labor costs and offer a competitive edge.

Beginning in the third quarter of 2024 and continuing through the first quarter of 2025, there has been a notable increase in M&A activity. Key transactions include:

  • Johnson & Johnson’s $15 billion acquisition of Intra-Cellular Therapies, focused on central nervous system (CNS) disorders
  • GSK’s $1 billion acquisition of IDRx, a developer of precision oncology therapies
  • AbbVie’s acquisitions of Aliada Therapeutics ($1.4 billion, CNS therapies) and Nimble Therapeutics ($200 million, immune-mediated disease therapies)

Following the first quarter of 2025, newly imposed tariffs have intensified the need for U.S.-based investment, as protectionist trade policies heighten the demand for domestic pharmaceutical production capacity and infrastructure. Couple that with the aforementioned demographic trends in the U.S., we have an investment environment poised for growth.

¹ America’s Health Rankings analysis of U.S. Census Bureau, Single-Race Population Estimates via CDC WONDER Online Database, United Health Foundation.
² Evaluate | Company Profiling search database

Measuring the Impact of Tariffs on Equity Performance

This week’s chart shows two indices created by Morgan Stanley that seek to track the performance of companies with different relationships to the global trade landscape. The first index, called “Tariff Exposed,” represents a group of stocks that are more negatively impacted by tariffs due to supply chains and revenue streams that are global in nature. The second, dubbed “Tariff Insulated,” tracks a basket of firms that are insulated from recent tariffs (or have mitigation strategies related to tariffs in place) due to the nature of their operations. The two indices are global, sector-neutral relative to each other, and include names across the Consumer Cyclical, Consumer Defensive, Industrials, Technology, Health Care, and Basic Materials spaces. Some of the largest constituents of the Tariff Exposed basket are Target, Deere & Co., Dell Technologies, and Intuitive Surgical. Tariffs have served as a headwind for these businesses thanks to their heavy dependence on imports (Target and Dell Technologies) and reliance on export markets (Deere & Co. and Intuitive Surgical). On the other hand, some of the largest constituents of the Tariff Insulated basket are Ulta Beauty, Levi Strauss, Domino’s Pizza, and McDonald’s. These companies have been less impacted by new trade restrictions thanks to localized sourcing of ingredients (Domino’s Pizza and McDonald’s) and diversified supplier bases (Ulta Beauty and Levi Strauss).

Since the start of 2025, the Tariff Exposed and Tariff Insulated indices have returned roughly -14.1% and -0.8%, respectively, as of this writing. Going forward, it is imperative that investors remain diversified across their equity portfolios to ensure exposure to those companies that can weather the tariff-induced storm and those that may be poised to bounce back as trade negotiations progress.

As Real Estate Finds Its Bottom, Alternative Sectors Become More Prominent

Since the onset of the pandemic, the commercial real estate market has experienced significant volatility — first benefiting from a post-pandemic surge, then grappling with a sharp downturn, and now showing signs of stabilization. With the third quarter of 2024 marking the first quarter of positive returns after eight consecutive quarters of losses, the fourth quarter performance added to the case that the asset class has found a floor. This newsletter outlines recent improvements not only across traditional sectors but also an expanding set of alternative property sectors. These alternatives, which include data centers, life sciences facilities, self-storage, and senior housing, reflect the changing composition of institutional real estate portfolios and the growing emphasis on diversification beyond the traditional core sectors. We also explore drivers of demand, specific opportunities in alternative real estate, and value-added real estate.